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Title: A brief note on DEBENTURES
Description: a long-term security yielding a fixed rate of interest, issued by a company and secured against assets.
Description: a long-term security yielding a fixed rate of interest, issued by a company and secured against assets.
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A Brief Note on Debentures
What is a Debenture?
A Debenture is a debt security issued by a company (called the Issuer), which offers to pay interest in
lieu of the money borrowed for a certain period
...
•
These are issued in denominations as low as Rs 1000 and have maturities ranging between one
and ten years
...
Unlike other Fixed Income Instruments such as Fixed Deposits, Bank Deposits they can be
transferred from one party to another by using transfer from
...
Now corporate/PSUs have started issuing debentures
in Demat form
...
In Simple Words, A debenture is a debt instrument, just like a fixed deposit (FD), usually issued by a
company
...
After the period gets over, you get back your principal amount
...
What are the different types of debentures?
Debentures are divided into different categories on the basis of: (1) convertibility of the instrument (2)
Security
Debentures can be classified on the basis of convertibility into:
•
Non Convertible Debentures (NCD): These instruments retain the debt character and can not
be converted in to equity shares
•
Partly Convertible Debentures (PCD): A part of these instruments are converted into Equity
shares in the future at notice of the issuer
...
This is
normally decided at the time of subscription
...
The ratio of conversion is decided by the issuer
...
•
Optionally Convertible Debentures (OCD): The investor has the option to either convert these
debentures into shares at price decided by the issuer/agreed upon at the time of issue
...
So if the issuer fails on payment of either the principal or interest amount, his
assets can be sold to repay the liability to the investors
•
Unsecured Debentures: These instrument are unsecured in the sense that if the issuer defaults
on payment of the interest or principal amount, the investor has to be along with other
unsecured creditors of the company
...
•
This is usually in the form of a first mortgage or charge on the fixed assets of the company on a
pari passu basis with other first charge holders like financial institutions etc
...
Most of the times
the charge is created on behalf of the entire pool of debenture holders by a trustee specifically
appointed for the purpose
...
What is a difference between a bond and a debenture?
Long‐term debt securities issued by the Government of India or any of the State Government’s or
undertakings owned by them or by development financial institutions are called as BONDS
...
The difference between the two is actually a function of where they are registered and pay
stamp duty and how they trade
...
For example, a 12% p
...
a
...
The date on which the term ends and proceeds are paid out is known as the
Maturity date
...
In respect of Demat Debt instrument due date is known from ISIN Number of the security
...
This is
known as Redemption or Repayment of the bond/debenture
...
If one gets less than the face value, then they are redeemed at a
discount and if one gets the same as their face value, then they are redeemed at par
...
For e
...
11% p
...
What is Yield to maturity (YTM)?
The yield or the return on the instrument is held till its maturity is known as the Yield‐to‐maturity (YTM)
...
This total income consists of the following:
Coupon income: The fixed rate of return that accrues from the instrument
Interest‐on‐interest at the coupon rate: Compound interest earned on the coupon income
Capital gains/losses: The profit or loss arising on account of the difference between the price paid for
the security and the proceeds received on redemption/maturity
...
•
A “put” option means that you have an option to surrender the debenture if you want to, and
get back your principal
...
•
A put option gives a lot of flexibility to you – if interest rates go up, and you can get better
rates from the market, you can exercise the put option and get back your money
...
•
A call option gives flexibility to the company – if interest rates go down, and the company can
get funds at lower rates from the market, it can exercise the call option and give your money
back to you
...
Income Tax Treatment?
For income tax purpose, the debentures are treated like debt instruments
...
•
If you sell the debenture on the stock exchange before holding it for a year, it would be a Short
Term Capital Gain – it would be included in your income and would be tax as per prevailing IT
slabs
...
This LTCG (Long Term Capital Gain) should be calculated without indexation, and
would be taxed at 10% of the gain
Title: A brief note on DEBENTURES
Description: a long-term security yielding a fixed rate of interest, issued by a company and secured against assets.
Description: a long-term security yielding a fixed rate of interest, issued by a company and secured against assets.